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Previously, we gave some advice on how to successfully solicit friends and family to become financial supporters for your business. While friends and family investors have been around for as long as entrepreneurs have been starting businesses, the rise of social media and the online economy has given rise to a thoroughly modern new way to raise capital—crowdfunding.
Crowdfunding allows entrepreneurs with a business proposal to pitch their ideas to anyone who has an internet connection and to receive contributions from anyone that wants to support their idea. Rather than providing you with a loan or buying an ownership stake in your business, crowdfunders simply pledge a specific dollar amount that they’re wiling to give to help you realize your dream, typically in exchange for a reward that demonstrates your appreciation for their contribution.
If this all sounds a bit farfetched, a quick look at the two leading crowdfunding sites, Kickstarter and IndieGoGo, reveals a host of entrepreneurial success stories, from the $1.5 million raised to design a better iPhone dock, to more modest victories like the $47,000 for a custom-fit jeans business, and the $6,000 to open a new hair salon.
In exchange for providing entrepreneurs with a platform to raise money, crowdfunding sites keep a small percentage (typically between five and ten percent) of the money raised. Kickstarter is focused on creative projects while IndieGoGo accepts a wider array of fundraising campaigns. Both sites have some specific rules about what type of projects they allow, so read up on their guidelines to figure out which one is better-suited to you. There are also a few smaller crowdfunding sites targeting the entrepreneurial community that may be worth checking out, including MicroVentures, ProFounder, and CircleUp.
If you decide to go the crowdfunding route, you’ll probably still get a large percentage of your money from friends and family. But you’ll also open yourself up to a much bigger pool including friends of friends, current customers and business associates, and if you’re lucky and your campaign goes viral, total strangers.
In order to launch a successful campaign try following these four steps.
If you end up successfully raising money through this exciting new vehicle, make sure to consult a tax professional to see what you need to do to properly account for your contributions.
*Disclaimer*: Harvard Business Services, Inc. is neither a law firm nor an accounting firm and, even in cases where the author is an attorney, or a tax professional, nothing in this article constitutes legal or tax advice. This article provides general commentary on, and analysis of, the subject addressed. We strongly advise that you consult an attorney or tax professional to receive legal or tax guidance tailored to your specific circumstances. Any action taken or not taken based on this article is at your own risk. If an article cites or provides a link to third-party sources or websites, Harvard Business Services, Inc. is not responsible for and makes no representations regarding such source’s content or accuracy. Opinions expressed in this article do not necessarily reflect those of Harvard Business Services, Inc.